Falling T-bill rates won’t reduce cost of credit - Report

The current falling Treasury bill rates will not reflect a drop in the cost of credit in Ghana, Ecobank Research has stated in its latest analysis of the Ghanaian economy.

According to the report, it does not expect a fall in Treasury yields to lower commercial banks’ cost of local currency funding.

The Research body said “we are already seeing a negative divergence between Treasury bills and overnight interbank rates. Usually, these two pricing benchmarks need to align. We also think that the fall in Treasury bills rates, which started in mid-November 2016, is largely artificial and not driven by strong macro fundamentals.”

But Research Analyst with Group Ndoum (GN) Research, Mr Emmanuel Zewu attributed the falling treasury yields to three factors including what he described as uncertainties that hung over Ghana’s 2016 Presidential and Parliamentary elections.

According to Mr Zewu, inflation has been on the decline since October 2016 and “this the T-bill rates responded to; so the question really is, why are the banks not reducing cost of borrowing following the fall in inflation?”

Mr Zewu explained that the falling rates could also be attributed to high expectations from investors of the new government.

“Depending on what investors expect government to do, will demand t bills now. In this regard, one can say that the fall will not be sustained for long,” he added.

Ghana’s Treasury bills rates have been plummeting since the latter part of 2016. Between auction value dates of November 14, 2016, and January 30, 2017, 91-day and 182-day interest rate equivalents have dropped by 6.4 and 6.2 percent respectively. However many analysts believe the rapid decline is cosmetic and does not merit the current economic fundamentals.

Ecobank Research explained that “Initially, we thought a sustained drop in these two core pricing benchmarks could create a domino effect: by first triggering a fall in commercial banks’ local currency (C balance sheet funding costs; then banks eventually transferring the benefits of lower Cedi funding costs to new borrowers through lower lending rates.”

However, the report added “we have come to the realisation that it’s not going to be that straightforward. First, we are seeing a sustained negative divergence between Treasury bills and overnight interbank rates. Overnight interbank rates are the actual representation of banks’ liquidity situation, and hence funding environment. Usually, these two pricing benchmarks need to align to ensure transmission efficacy.”

Going on, the report believed there is a significant economic overhang, adding the economic situation still remains a concern and there are various pressure points, ranging from the electricity crisis to still low global commodity prices albeit rising oil prices.